The ATO has released draft guidelines on how it will assess Pt IVA risk applying to the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income.
ATO Deputy Commissioner Michael Cranston said the draft guidelines explain how professionals can assess the tax risks flowing from the use of partnerships of discretionary trusts and similar structures. “Professional practices may legitimately operate as a partnership of discretionary trusts or through similar structures. The ATO is reviewing remuneration arrangements used by accountants, lawyers and other professionals to make sure people are using these structures appropriately,” he said.
Mr Cranston also said the draft guidelines set out what the ATO considers to be low risk, legally effective arrangements, and what the ATO considers to be high risk arrangements that might attract attention. The draft guidelines have been co-designed with industry representatives and have been issued as a working draft for ongoing public consultation. The ATO said the draft guidelines will be applied from the 2014-15 income tax year.
Source: ATO media release, 1 September 2014
[LTN 153, 11/8/14]
Extract from Guidelines
Taxpayers will be rated as LOW RISK, and will not be subject to compliance action on this issue [application of Part IVA], where their circumstances indicate they meet one of the following guidelines regarding income from the firm (salary, distribution of partnership or trust profit, distributions from associated service entities, dividends from associated entities or any combination of these):
- the IPP [Individual Professional Practitioner] receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm. In determining an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or if there are no such employees in the firm, comparable firms or relevant industry benchmarks – for example, industry benchmarks for a region provided by a professional association, agency or consultant, and/or
- 50% or more of the income to which the IPP and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the IPP, or
- the IPP, and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.
Where none of the guidelines outlined above can be satisfied, the IPP’s arrangement will be considered higher risk. In these cases, the lower the effective tax rate, the higher the ATO will rate the compliance risk posed by the arrangements and the greater the likelihood of ATO compliance action being commenced. For example, an arrangement with an effective tax rate of 15% will be rated as higher risk than one with an effective tax rate of 25%.